SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-K
X ANNUAL REPORT PURSUANT TO SECTION 13 or 15(d) OF THE SECURITIES EXCHANGE
ACT OF 1934
FOR THE FISCAL YEAR ENDED OCTOBER 31, 1996
OR
TRANSITION REPORT PURSUANT TO SECTION 13 or 15(d) OF THE SECURITIES EXCHANGE
ACT OF 1934 For the transition period from __________ to __________
COMMISSION FILE NUMBER 0-27022
OPTICAL CABLE CORPORATION
(EXACT NAME OF REGISTRANT AS SPECIFIED IN ITS CHARTER)
Virginia 54-1237042
(State of incorporation) (I.R.S. Employer
Identification No.)
5290 Concourse Drive
Roanoke, Virginia 24019 (540) 265-0690
(Address of principal (Telephone Number)
executive offices)
Securities registered pursuant to Section 12(b) of the Act:
None
Securities registered pursuant to Section 12(g) of the Act:
Common Stock, no par value
Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days. (1) Yes X No (2) Yes X No
Indicate by check mark if disclosure of delinquent filers pursuant to Item
405 of Regulation S-K is not contained herein, and will not be contained, to the
best of registrant's knowledge, in definitive proxy or information statements
incorporated by reference in Part III of this Form 10-K or any amendment to this
Form 10-K. X
The aggregate market value of shares of common stock held by non-affiliates
at December 31, 1996 was $30,721,284.
As of January 15, 1997, 38,675,416 shares of the Registrant's Common Stock
were outstanding.
DOCUMENT INCORPORATED BY REFERENCE
PORTIONS OF THE REGISTRANT'S NOTICE OF 1997 ANNUAL MEETING AND PROXY STATEMENT
PART I
ITEM 1. BUSINESS
GENERAL
The Company manufactures and markets a broad range of fiber optic cables for
"high bandwidth" transmission of data, video and audio communications over
moderate distances of up to approximately 10 miles. The Company's cables can be
used both indoors and outdoors, are easy and economical to install, and provide
a high degree of reliability. The Company believes that its products are widely
accepted for use in fiber optic local area networks ("LANs") and are
increasingly accepted in other communications applications. The Company's
products directly address the needs of the moderate distance market by utilizing
a tight-buffered coating that protects the optical fiber and a cable design that
achieves superior mechanical and environmental performance.
The Company was incorporated in Virginia in 1983. The Company's executive
offices are located at 5290 Concourse Drive, Roanoke, Virginia 24019, telephone
number (540) 265-0690.
INDUSTRY BACKGROUND AND MARKETS
APPLICATION OF FIBER OPTIC COMMUNICATIONS TECHNOLOGY
Fiber optic technology was developed in the mid-1970s as a communications
medium offering numerous technical advantages over metallic conductors such as
copper. Optical fiber is an ultrapure glass structure that has been pulled into
a hair thin strand. Optical fiber's advantages include its high bandwidth, which
permits reliable transmission of complex signals such as multiple high-quality
audio and video channels, high-speed data formats such as Fiber Distributed Data
Interface ("FDDI") and Asynchronous Transfer Mode ("ATM"), other LAN
transmissions, and high-definition television. Relative to copper, optical fiber
has thousands of times the information carrying capacity, occupies much less
space and operates more reliably over greater distances. Furthermore, it is
immune to the electromagnetic interference that causes static in copper wire
transmission, as well as to electrical surges. Because optical fiber does not
carry electricity, it is a safer choice in flammable environments. Additionally,
communicating through optical fiber is more secure than copper because tapping
into fiber optic cable without detection is very difficult. Optical fiber also
enjoys technical advantages over other communications media such as satellite
and microwave communications, particularly in applications over shorter
distances.
Because most of the world's information storage, reception and display
systems (such as computers, telephones and televisions) are electronically
based, various electro-optical hardware components must be attached to each end
of an optical fiber. For instance, a laser or light emitting diode converts
electrically encoded information into light signals, which travel over the
optical fiber to the terminal point of reception. At the terminal point a
photodetector converts the information back to its original form. Other passive
optical components such as optical connectors and splices facilitate the travel
of a light signal from one optical fiber to another or to another
electro-optical component, while couplers and splitters combine or divide
signals, thereby permitting simultaneous distribution of information to or from
multiple locations. Despite early and widespread appreciation of optical fiber's
superior technical characteristics, until the late 1970s the costs associated
with the necessary electro-optical transmitters and receivers rendered
commercial applications prohibitively expensive.
The Company believes there is a perception that fiber optic cable, because it
is different from copper cable, is difficult to install and maintain. This
perception is being overcome as fiber optic cable is more widely used. Also,
like copper cable, fiber optic cable is restricted to applications in which it
is possible to lay cable between the point of transmission and the point of
reception. Wireless communication media do not have this limitation.
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THE LONG DISTANCE TELEPHONE MARKET
In the 1970s private industry began to develop optical fiber systems for long
distance commercial applications, particularly the U.S. telephone networks. For
this application, the expense of electro-optical components posed a lower cost
barrier because relatively few terminal components were required for long
distance transmissions. For the long distance telephone market, "single mode"
optical fiber was developed. To protect this early generation of fiber without
adversely affecting its optical performance, fiber optic cable producers chose a
high density (i.e., high fiber count) "loose tube" cable construction. This
cable design was developed to put minimal stress on the optical fibers, which
initially were particularly fragile, and to put many optical fibers in a small,
relatively inexpensive cable. When such cables proved vulnerable to water
penetration, manufacturers added a water-blocking but flammable gel, making them
unsuitable for indoor use.
Once fiber optic technology achieved cost parity with copper for the long
distance telephone application, U.S. long distance carriers aggressively
installed fiber optic routes across the United States. By the late 1980s,
optical fiber constituted nearly all of the long distance telephone network, as
well as the interoffice local exchange network connecting central telephone
offices in the same area.
THE MODERATE DISTANCE MARKET
In the 1970s the U.S. government made available substantial funds for
research and development to determine the viability of optical fiber as a
solution to critical communications problems faced by the military and other
agencies. In the course of addressing these challenging, multiple termination
point applications, which were predominately over moderate distances, engineers
achieved significant technological advances. Such advances included the
introduction of "multimode" optical fiber and the development of an
easy-to-handle "tight-bound" cable structure that afforded the optical fiber
effective protection against mechanical shock, water, extreme temperatures and
other stresses likely to be encountered in a battlefield environment.
High levels of production of optical fiber, cable and components for the long
distance telephone market since the mid-1980s have resulted in cost reductions
that make fiber optic cable economically feasible for a growing number of
potential customers with moderate distance business application needs. Such
applications include data communications, LANs, telecommunications, video
transmission, including cable television, and military tactical communications.
Particularly in data communications, high performance, rugged, and survivable
fiber optic cable is well suited and has become economically attractive for
diverse and often unpredictable installation environments. The Company believes
that the LAN market is particularly attractive. LANs are often installed at
corporate offices, hospitals, utilities, academic campuses, factories and
transportation management facilities.
The increasing standardization of communications technology and the
increasing demand for high bandwidth (i.e., high data capacity or volume) are
expected to facilitate optical fiber's further penetration of the moderate
distance market presently served by copper cable. Fiber optic cable is better
able to maximize the utility of emerging LAN interface standards, such as FDDI
and ATM, and has therefore become a preferred data transmission medium. In
addition, high speed, high bandwidth applications, such as video conferencing,
imaging and Internet access, are growing and are driving increased demand for
fiber optic cable in moderate distance applications.
With the movement toward deregulation and competition, the large cable
television companies, often referred to as Multiple System Operators, the
Regional Bell Operating Companies ("RBOCs"), and other independent long distance
carriers are competing to provide enhanced cable television, data, and other
information highway services to homes and businesses. Many of these companies
are conducting field trials of optical fiber systems in the portion of the U.S.
telephone networks which lies between telephone companies' central offices and
subscribers' offices and homes (the "subscriber loop"). To date, the subscriber
loop remains overwhelmingly copper. Because the subscriber loop represents
approximately 90% of the U.S. telephone system (measured by total length of
cable), the potential demand for fiber optic cable in this application is very
large, provided that cost parity with copper cable systems can be achieved.
3
THE COMPANY'S SOLUTION
Fiber optic cables used for moderate distance applications may be subjected
to many different stress environments. Cables installed inside buildings may be
routed through cable trays, floor ducts, conduits and walls and may encounter
sharp corners or edges. They may be pulled without lubricant, resulting in
higher pull tensions, and stressed to the breaking point if care is not used. In
the outdoor and underground environments, cables are often subjected to
moisture, ultra-violet radiation and long pulling distances through conduits
with a variety of bends and corners, resulting in high pulling tensions. These
conditions can be aggravated if installers are not adequately trained in the
installation of fiber optic cable. The Company's founders recognized that, for
many applications, the stresses on the cables during installation are similar to
those in the military tactical environment, for which the Company's technology
was initially developed. The Company applied this technology to commercial
products serving a market that could not be adequately served by gel-filled,
loose tube cable manufactured for the long distance telephone market.
The Company believes that nearly one-half of the fiber optic cable sold in
the moderate distance market today is the gel-filled, loose tube type, which
requires careful installation and extensive preparation for termination with
connectors. While this cable design has served the long distance telephone
market reasonably well, it was not designed to withstand the stress that cables
undergo during installation in the LAN or subscriber loop environments.
Gel-filled, loose tube cables are difficult to terminate with connectors,
because they cannot be mechanically attached directly to the cable's optical
fibers. Designed for long, straight outdoor runs, the cables are stiff and
difficult to place in complex installations and are flammable and thus not
suited for indoor use. When used for indoor/outdoor installations, these cables
must be spliced near the building entrance to flame retardant cables suitable
for indoor use, adding cost and complexity and reducing reliability. Therefore,
the total installed cost of gel-filled, loose tube cables is high in moderate
distance applications.
In contrast, the Company's products address the needs of the moderate
distance market by utilizing a tight-buffered coating that protects the optical
fiber and a cable design that achieves superior mechanical and environmental
performance. The Company's products are derived from technology originally
developed for military applications requiring very rugged, flexible and compact
fiber optic cables. Unlike gel-filled cables, the Company's cables may be used
indoors and outdoors, are flame resistant, flexible, easy and economical to
install, and provide a high degree of reliability. The Company believes that
because of these features, its products are widely accepted for use in fiber
optic LANs and are increasingly accepted in other applications.
THE COMPANY'S STRATEGY
The Company's primary strategy is to capitalize on its proprietary cable
manufacturing processes and technologies to provide a comprehensive line of
versatile fiber optic cables with superior features and competitive pricing that
appeals to the large, diverse and growing market for high bandwidth
communications over moderate distances.
FOCUS ON THE MODERATE DISTANCE MARKET
Optical fiber has become an accepted medium for the transmission of data,
video and audio in moderate distance applications in cities, factories, high
rise buildings, and on campuses. High speed, high bandwidth applications
deployed in LAN environments are growing in both large and small corporations
and are driving increased demand for optical fiber. Increasing deployment of
multimedia systems on LANs that utilize protocols such as FDDI and ATM also
enhances the demand for bandwidth.
The Company's products address the needs of the moderate distance market by
utilizing a tightbuffered coating that protects the optical fiber and a cable
design that achieves superior mechanical and environmental performance. The
Company believes that because of the outstanding features of its fiber optic
cable, including suitability for indoor and outdoor use, easy and economical
installation and a high degree of reliability, the Company's products have
become well established for optical fiber LANs and are increasingly accepted for
other applications.
4
DEVELOP HIGH PERFORMANCE PRODUCTS AND OFFER A BROAD PRODUCT LINE
The Company believes that serving both the premium performance and the price
competitive parts of the moderate distance market best utilizes its development
and manufacturing capabilities. The Company's Ultra-Fox(TM) product line
provides optical fiber products that are competitively priced, with features
that the Company believes are superior to its competitors' offerings. The
Ultra-Fox(TM) plus product line shares many of the materials and features with
the Company's military tactical cable products and is marketed to customers who
want the most reliable installations for their critical communication or control
processes. Since January 1994, the Company's quality management system has been
certified to the internationally recognized ISO 9001 quality standard.
LEVERAGE EXISTING TECHNOLOGIES AND KNOWLEDGE
The Company has extensive expertise in optical fiber packaging and
applications design, which it utilizes for new products. The Company is
responsive to, and works to anticipate the requirements of, its customers. Its
expertise with tight-buffered cable technology facilitates development of new
products and variations of existing products. Products that are developed for a
special application also may be introduced to the broader market.
CAPITALIZE ON PROPRIETARY, FLEXIBLE MANUFACTURING PROCESSES
The Company believes that its customized, internally developed manufacturing
processes provide a competitive advantage. The Company has developed proprietary
process control systems to ensure consistency and uniformity at high throughput
rates and intends to continue the upgrade of its manufacturing capability.
Through construction completed in January 1997, the Company expanded its
facilities to increase its manufacturing capacity. Ample capacity, versatile
production processes and a broad range of products are intended to enable the
Company to be flexible and responsive to customer needs.
OFFER COST EFFECTIVE SOLUTIONS TO ITS CUSTOMERS
The Company believes that its products are rugged, easy to install, versatile
and highly reliable, making them attractive to distributors, installers, and
most importantly, end users. Because the Company's cables are multipurpose,
distributors can stock fewer varieties and therefore less quantities of cable.
For installers and systems integrators, the multipurpose feature can
significantly reduce installation costs by eliminating the need to transition
from indoor cable to outdoor cable at a building entrance. This also enhances
reliability by eliminating splices and possible high stress on optical fibers
that could lead to breakage. This simplified installation, lower cost and
enhanced reliability are also valued by the end user, because a long lasting,
trouble-free cable is the basis for minimizing down time and maximizing system
availability.
EXPAND DISTRIBUTION AND MARKETING PRESENCE
The Company intends to increase its sales and marketing activities both
domestically and internationally. The Company distributes its products through
independent distributors to supplement the Company's existing distribution
channels and to provide the Company with access to a greater number of potential
customers in the United States. Despite limited resources dedicated to
international sales and marketing, revenues from international sales were
approximately 25%, 24% and 25% in fiscal 1994, 1995 and 1996, respectively. The
Company intends to hire more sales personnel to manage and expand its
international distribution network. However, there can be no assurance that the
Company will have the financial resources required to increase its sales and
marketing activities domestically or internationally, or to hire additional
sales personnel.
PRODUCTS AND TECHNOLOGY
PRODUCTS
The Company manufactures and markets a broad range of fiber optic cables
that provide a high bandwidth transmission for data, video and audio
communications over moderate distances. The Com
5
pany's products are derived from technology originally developed for military
applications requiring very rugged, flexible and compact fiber optic cables. The
Company's method of applying a tight-buffered coating on each optical fiber
before it is encased minimizes microbending, the primary cause of signal loss in
optical fibers.
The Company has pioneered a pressure-extrusion technique for applying a cable
jacket directly over the fiber optic cable core elements, resulting in high
cable tensile strength and lateral stress resistance. Such Core-Locked(TM)
jackets allow the cable to operate as a single mechanical unit, maximizing
resistance to tears during installation pulls through narrow spaces. The
Company's product line is deliberately diverse and flexible, in keeping with the
evolving application needs within the moderate distance market. Most of the
Company's cable designs are available in both the Ultra-Fox(TM) Plus premium
product and the Ultra-Fox(TM) highly featured but cost competitive commercial
product.
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PRODUCT TYPE FEATURES/DESCRIPTION APPLICATIONS
- -------------------------------- ------------------------------------------ -----------------------------------------
O SIMPLEX (ONE OPTICAL FIBER) AND
DUPLEX (TWO OPTICAL FIBERS) CABLES O SHORT "PATCH CORD" CABLES
O TIGHT-BUFFERED COATING ON EACH O LINKS BETWEEN ELECTRONIC
OPTICAL FIBER EQUIPMENT AND MAIN FIBER OPTIC CABLE
O ARAMID YARN STRENGTH MEMBERS O ROUTING CONNECTIONS IN PATCHING
A-Series Simplex and Duplex o thermoplastic outer jacket systems
"Assembly" Cables............... o flame retardant o indoor use
o 2 to 156 optical fibers
o tight-buffered coating on each o direct termination with connectors on
optical fiber each optical fiber
o elastomeric jacket encases each o short and moderate distance links
optical fiber and surrounding aramid yarn between buildings or within a building,
strength members (similar to an A-Series where multiple termination points are
simplex cable) needed
o Core-Locked(TM) outer jacket o installations where ease of
o rugged termination and termination cost are
o flame retardant important factors
B-Series "Breakout" Cables ..... o moisture and fungus resistant o indoor and outdoor use
o 2 to 156 optical fibers
o tight-buffered coating on each
optical fiber
o Core-Locked(TM) outer jacket
encases the optical fibers and
aramid yarn strength members
o smaller, lighter and less expensive
than the B-Series cable o longer distance runs where size and
o high strength to weight ratio cable cost are more significant
o compact size o can be armored for additional
o rugged protection in buried and overhead
D-Series "Distribution" o flame retardant installations
Cables.......................... o moisture and fungus resistant o indoor and outdoor use
o up to 864 optical fibers in various
subgroup sizes o high fiber count systems o
multi-fiber subcables, each similar to o
subgroups needed to facilitate a D-Series
cable organization of large numbers of optical
o Core-Locked(TM) outer jacket fibers
surrounds subcables o subcables routed to
different o high density "micro" construction
locations o rugged o installations requiring
several
G-Series "Subgrouping" o flame retardant different optical fiber types
Cables.......................... o moisture and fungus resistant o indoor and outdoor use
7
A-Series Simplex and Duplex "Assembly" Cables. Simplex and duplex cables are
round single fiber and "zip cord" two-fiber structures, respectively. Both
cables contain tight-buffered optical fibers, aramid yarn strength members and a
thermoplastic outer jacket for each fiber. They are used for "jumpers" (short
length patch cords) and for "pigtails" (short lengths of cable with a connector
on one end). Various outer jacket materials are offered to provide flammability
ratings and handling characteristics tailored to customers' needs. These cables
are often privately labeled and sold to original equipment manufacturers
("OEMs") who produce the cable assemblies.
B-Series "Breakout" Cables. The B-Series cables consist of a number of
subcables, each consisting of a single optical fiber and aramid yarn strength
members similar to an A-Series simplex cable. These subcables are tight-bound in
a pressure-extruded, high performance Core-Locked(TM) PVC outer jacket to form
the finished multi-fiber cable. Like the A-Series cables, the subcables are
intended to be terminated directly with connectors. This direct termination
feature makes this cable type particularly suited for shorter distance
installations, where there are many terminations and termination costs are more
significant. The materials and construction of the cable permit its use both
indoors and outdoors. These features make the cable cost effective for use in
campus and industrial complex installations, between and within buildings.
D-Series "Distribution" Cables. The Company's D-Series cables are made with
the same tight-buffered optical fiber and high performance Core-Locked(TM) PVC
outer jacket as the B-Series cable. Unlike the B-Series cable, however, each
tight-buffered optical fiber in a D-Series cable is not covered with a separate
subcable jacket. D-Series cable is intended for longer distance applications,
where termination considerations are less important and often traded off for
size, weight and cost. The tightbuffered optical fiber and Core-Locked(TM) PVC
outer jacket make D-Series cables rugged and survivable, with a small,
lightweight configuration. The high strength to weight ratio of these cables
makes them well suited for installations where long lengths of cables must be
pulled through duct systems. D-Series cable is used in relatively longer length
segments of installations.
G-Series "Subgrouping" Cables. This cable design combines a number of
multi-fiber subcables, each similar to a D-Series cable. Each multi-fiber
subcable is tight-bound with an elastomeric jacket, providing excellent
mechanical and environmental performance. These subcables are contained in a
pressure extruded, high performance Core-Locked(TM) PVC outer jacket to form the
finished cable. This design permits the construction of very high fiber count
cables. These cables may be used where groups of optical fibers are routed to
different locations. The Company has fabricated a developmental sub-group cable
containing over 1,000 fibers intended for high density, moderate length routes
such as urban telephone distribution systems.
Other Cable Types. The Company produces many variations on the basic cable
styles presented above for more specialized installations. For outdoor
applications, both the B-Series and D-Series cables may be armored with
corrugated steel tape for further protection in underground or overhead
installations. For overhead installations on utility poles, the Company offers
several self-supporting versions of the D-Series cables, with higher performance
outer jackets. One contains additional aramid yarn strength members, to support
its weight with wind and ice loading over long unsupported lengths. Another
style has a separate strength member, either metallic or non-metallic, in a
figure eight configuration, to reduce installation costs. The Company's cables
are available in several flammability ratings, including "plenum" for use in
moving air spaces in buildings, and "riser" for less critical flame retardant
requirements. "Zero halogen" versions of the B-Series and D-Series cables are
available for use in enclosed spaces where there is concern over release of
toxic gases during fire. Composite cables combining optical fiber and copper are
offered to facilitate the transition from copper-based to optical fiber-based
systems without further installation of cable.
PRODUCT DEVELOPMENT
The Company continues to develop enhancements to its fully automated,
computer-controlled production processes that it believes increase product
quality and reduce costs. Many of the Company's technological advances are the
result of refinements and improvements made during production runs.
Occasionally, potential customers contact the Company to develop new products or
modified product
8
designs for them, which ultimately may appeal to other customers. The
development costs associated with new products and modified product designs
requested by the customer are included in the price charged to that customer. By
utilizing these new products and modified product designs, the Company continues
to improve its product line with minimal direct expenditures for research and
development.
MAJOR MARKET APPLICATIONS
The most common application of the Company's products is in LANs, where
optical fiber is widely used as the "backbone" or "trunk," connecting groups of
work stations and central file servers. In its typical implementation, the fiber
optic cable may be installed between wiring closets in a building, or installed
between buildings in a multi-building complex. Fiber optic cable runs between
electronic equipment that combines the signals of many workstations. Because the
combined signals may carry a large volume of critical information, fiber optic
cable, which is immune to electrical interference, is often desired. In
comparison, copper wires carry less information, or the same amount of
information for a shorter distance, in either case remaining susceptible to
electrical noise and interference. The following are typical applications for
the Company's fiber optic cable:
Office Facilities. Banks, stock trading companies, insurance companies, and
other businesses often have a need to distribute information among a large
number of work stations, have time-critical data and would incur severe costs as
a result of system failures. A LAN connected with fiber optic cable has in the
past several years been an increasingly common way of implementing management
information systems for these businesses.
Educational Institutions. Colleges and universities have been leaders in
implementing large fiber optic networks. More recently, many states have
undertaken large scale projects to install networks in high schools and even
grade schools. These systems link personal computers with central file servers.
As interactive learning systems require increased transmission speeds, optical
fiber becomes a logical medium.
Manufacturing and Mining Facilities. Manufacturing and mining facilities are
typically not air conditioned, are less clean and otherwise have a less
controlled environment than businesses generally. They often contain heavy
electrical equipment, which causes electromagnetic interference if conventional
copper cable is used. The advantages of fiber optic cable in this environment
include immunity to electrical noise, ruggedness, high information carrying
capacity and greater distance capability. The Company's products are installed
in automotive assembly plants, steel plants, chemical and drug facilities,
petroleum refineries, mines and other similar environments.
Health Care Facilities. Hospitals have extensive data transfer needs for
medical records, patient monitoring, inventory, billing and payroll functions.
More recently, the transfer of electronically stored images of x-rays, MRIs and
CAT scans has increased to facilitate analysis and diagnosis at multiple
locations. These applications require high data transfer rates. Optical fiber is
a preferred solution, especially in electromagnetic environments with heavy
electrical equipment such as x-ray machines.
Traffic Control Systems. Traffic system applications range from surveillance
and control of traffic flow in cities to installation of sensors, automatic toll
collection, video monitoring and control of signs in "smart" highway programs.
These applications often require transmission of high bandwidth signals such as
video monitoring, for which optical fiber is well suited. The Company's cables
offer ruggedness, reliability and cost savings for termination in systems that
are near the vibrations of traffic and require many termination points.
Telephone Companies. The Company has worked with several RBOCs for their
business customers' requirements. As high bandwidth services of the information
highway are brought closer to more homes and businesses, the bandwidth of
optical fiber becomes more important.
SALES, MARKETING AND CUSTOMER SERVICE
The Company's products are sold to end users, electrical contractors, system
integrators, value-added resellers ("VARs"), OEMs and distributors. Distribution
methods are adapted to the particular needs of different types of customers. The
decision to purchase the Company's products may be made
9
by end users, distributors, electrical contractors, system integrators or
specialized installers. The Company attempts to reach these decision makers by
advertising in fiber optics trade journals and other communications magazines.
The Company also participates in numerous domestic and international trade shows
attended by customers and prospective customers. International sales are made
primarily through foreign distributors, system integrators and VARs.
The Company's field sales force consists of independent sales representatives
located in various geographic areas. The field sales force provides sales
support for distributors, system integrators and VARs and communicates with the
customer's purchase decision makers. The field sales force is supported by
inside sales personnel and supervised by regional sales managers. The inside
sales group provides quotations and customer service. The regional sales
managers provide on-site sales support with major customers and are responsible
for major customers and opportunities. For more in-depth technical support, the
sales group has access to engineering, quality control and management personnel
who have extensive fiber optic cable expertise and industry experience.
Furthermore, the Company believes that it has a reputation for product
excellence based on its success with large projects for end users such as
Chrysler Corporation, 3M, Virginia Polytechnic Institute and State University,
Bankers Trust and Salomon Brothers Inc, and for integrators such as Ameritech
Information Systems and US WEST. The Company had no single customer that
accounted for more than 5% of its net sales in either fiscal 1994, 1995 or 1996.
However, in fiscal 1995 and 1996, 10% and 12%, respectively, of net sales was
attributable to one major domestic distributor. Most of the Company's revenue in
each quarter results from orders received in that quarter. Accordingly, the
Company does not believe that its backlog at any particular point in time is
indicative of future sales. The Company believes that its customer base is
diverse, crossing over many markets and regions worldwide and believes that it
is important to maintain that diversity to avoid dependence on any particular
segment of the economy or area of the world.
MANUFACTURING AND SUPPLIERS
The Company's manufacturing operations consist of applying a variety of raw
plastic materials to optical fibers. The key raw material in the manufacture of
the Company's products is optical fiber, which the Company currently purchases
from four manufacturers. The Company works with its vendors in an effort to
ensure a continuous supply. The Company utilizes two sources for the cable's
aramid yarn strength member and several suppliers of coating materials. The
Company has not experienced difficulty in arranging alternate sources. All other
raw materials have at least one backup source.
The Company believes that by maintaining a consistent relationship with
suppliers, it can obtain better quality control and emergency deliveries. Being
able to deliver product on time has been an important factor in the Company's
success. To date, the Company has been able to obtain adequate supplies of its
raw materials in a timely manner from existing sources or, when necessary, from
alternate sources. However, any disruption in the supply of raw materials could
adversely affect the Company's cable production capability and its operating
results.
The Company believes that other fiber optic cable manufacturers generally
carry minimal amounts of raw materials and finished goods inventory. The Company
generally holds raw materials and finished goods inventory in amounts greater
than that of its competitors to ensure a quick response after receiving a
customer's order.
The Company believes its quality control procedures have been instrumental in
achieving the performance and reliability of its products. The Company produces
cable using the quality control procedures of MIL-I-45208 (the primary standard
applicable to most government purchasers of cable).
Since January 1994, the Company's quality management system has been
certified to the internationally recognized ISO 9001 quality standard. ISO 9000
is a series of standards agreed to by the International Organization for
Standardization (ISO). ISO 9001 is the highest level of accreditation and
includes an assessment of 20 elements covering various aspects of design
development, procurement,
10
production, installation and servicing. The Company's certification was obtained
through an audit by a qualified international certifying agency. In order to
maintain its certification, the Company must continue to comply with the
standards.
PROPRIETARY RIGHTS
None of the Company's current manufacturing processes or products is
protected by patents. The Company relies on a combination of trade secret,
copyright and trademark law, nondisclosure agreements and technical measures to
establish and protect its rights pertaining to its production technology. Such
protection may not deter misappropriation or preclude competitors from
developing production techniques or equipment with features identical, similar
or superior to the Company's. The Company believes, however, that because of the
rapid pace of technological change in the data communications industry and
particularly in the fiber optic cable segment, legal protection for the
Company's products is less significant to the Company's prospects than the
knowledge, ability and expertise of its management and technical personnel with
respect to the timely development and production of new products and product
enhancements. The Company considers its proprietary knowledge with respect to
the development and manufacture of fiber optic cable to be a valuable asset.
This expertise enables the Company to formulate new cable compositions, develop
special coatings and coating methods, develop and implement manufacturing
improvements and quality control techniques, and design and construct
manufacturing and quality control equipment. The Company restricts access to its
manufacturing facility and engineering documentation to maintain security.
Employees are required to sign nondisclosure agreements.
The Company believes that none of its products, trademarks or other
proprietary rights infringes upon the proprietary rights of others. There can be
no assurance, however, that third parties will not assert infringement claims
against the Company in the future with respect to the Company's present or
future products which may require the Company to enter into license agreements
or result in protracted and costly litigation, regardless of the merits of such
claims.
COMPETITION
The market for fiber optic cable, including the moderate distance market in
which the Company's products are concentrated, is highly competitive. Siecor
Corp. (a joint venture of Siemens AG and Coming) and AT&T are the leading
manufacturers of fiber optic cable for both the long distance telephone market
and the moderate distance market. Although both manufacture gel-filled, loose
tube cables, a significant portion of AT&T and Siecor Corp.'s fiber optic cable
sales are tight-buffered fiber optic cable products in the moderate distance
market. Also, Coming and AT&T are principal suppliers of optical fiber
worldwide. The Company's competitors, including Siecor Corp. and AT&T, are more
established, having a large business base in the long distance telephone,
gel-filled, loose tube cable market. Those companies can benefit from greater
market recognition and have greater financial, research and development,
production and marketing resources than the Company.
Additionally, fiber optic cable competes with copper wire cable on the basis
of cost and performance tradeoffs. The cost of the electro-optical interfaces
required for fiber optic systems and higher speed electronics generally
associated with high performance fiber optic systems can make them uncompetitive
in applications where the advantages of optical fiber are not required. Fiber
optic cable also competes with other alternative transmission media including
wireless and satellite communications.
The Company believes that it competes successfully against its competitors on
the basis of breadth of product features, quality, ability to meet delivery
schedules, technical support and service, breadth of distribution channels and
price. Maintaining such competitive advantages will require continued investment
by the Company in product development, sales and marketing. There can be no
assurance that the Company will have sufficient resources to make such
investments or that the Company will be able to make the technological advances
necessary to maintain its competitive position. An increase in competition could
have a material adverse effect on the Company's business and operating results
because of price reductions and loss of market share. Competition could increase
if new companies enter the market or if existing competitors expand their
product lines.
11
EMPLOYEES
As of October 31, 1996, the Company employed a total of 134 persons,
including 44 in sales, marketing and customer service, 11 in engineering,
product development and quality control, 66 in manufacturing, and 13 in finance
and administration. None of the Company's employees is represented by a labor
union. The Company has experienced no work stoppage and believes its employee
relations are excellent. The Company has a monthly bonus plan for all employees
along with an end of year profit sharing plan.
ITEM 2. PROPERTIES
The Company's principal administration, marketing, manufacturing, and product
development facilities are located in a 148,000 square foot building located
adjacent to the Roanoke, Virginia airport and major trucking company
facilitates. These facilities were expanded from 74,000 to 148,000 square feet
through construction which was completed in January 1997 on land purchased by
the Company in 1994 adjacent to the Company's existing facilities. The Company
believes that its production equipment is presently operating at approximately
50% of its capacity.
ITEM 3. LEGAL PROCEEDINGS
In the opinion of the Company's management, there are no legal proceedings
pending to which the Company is a party or to which any of its properties is
subject, other than ordinary, routine litigation incidental to the business
which is not expected to have a material adverse effect on the results of
operations, financial condition or cash flows of the Company.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
None
12
PART II
ITEM 5. MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER MATTERS
The Company's Common Stock has traded on the Nasdaq National Market under the
symbol OCCF since April 2, 1996. The following table sets forth for the fiscal
periods indicated the high and low sales prices of the Common Stock, as reported
on the Nasdaq National Market.
FISCAL YEAR ENDED OCTOBER 31, 1996 HIGH LOW
- --------------------------------------------- ------ -----
2
Second Quarter (April 2 to April 30, 1996)* . 4 5/8 3/8
4
Third Quarter (May 1 to July 31, 1996)* ..... 34 1/4
Fourth Quarter (August 1 to October 31, 8
1996)........................................ 20 1/4
* The Company's stock split 2 for 1 on May 31, 1996 and 2 for 1 on June 21,
1996. All per share amounts reported have been adjusted to give retroactive
effect to these stock splits.
As of December 31, 1996, there were an estimated 6,050 holders of record of
the Common Stock.
Prior to terminating its status as an S corporation on March 31, 1996, the
Company made cash distributions to its sole shareholder primarily to pay income
tax liabilities arising from the Company's status as an S corporation. The
Company has not otherwise paid or declared any cash dividends on its common
stock and does not anticipate paying any cash dividends on its common stock in
the near future.
13
ITEM 6. SELECTED FINANCIAL DATA
OPTICAL CABLE CORPORATION
SELECTED FINANCIAL DATA
YEARS ENDED OCTOBER 31,
------------------------------------------------------
1996 1995 1994 1993 1992
---------- ---------- ---------- ---------- ----------
(IN THOUSANDS, EXCEPT PER SHARE DATA)
Statement of Income Data:
Net sales.................................. $45,152 $36,360 $26,217 $24,980 $19,774
Cost of goods sold......................... 24,907 20,121 14,138 13,036 10,342
---------- ---------- ---------- ---------- ----------
Gross profit.............................. 20,245 16,239 12,079 11,944 9,432
Total operating expenses................... 8,416 7,660 7,967 7,724 6,526
---------- ---------- ---------- ----------
Income from operations.................... 11,829 8,579 4,112 4,220 2,906
Other income (expense), net................ 198 (379) (614) (870) (1,100)
---------- ---------- ---------- ---------- ----------
Income before income tax expense and
extraordinary item....................... 12,027 8,200 3,498 3,350 1,806
Income tax expense (1)..................... 2,806 -- -- -- --
---------- ---------- ---------- ---------- ----------
Income before extraordinary item.......... 9,221 8,200 3,498 3,350 1,806
Extraordinary item......................... -- -- (149) -- --
---------- ---------- ---------- ---------- ----------
Net income................................ $ 9,221 $ 8,200 $ 3,349 $ 3,350 $ 1,806
========== ========== ========== ========== ==========
Pro forma Income Data (1):
Net income before pro forma income tax
provision, as reported.................... $ 9,221
Pro forma income tax provision............. 1,747
----------
Pro forma net income....................... $ 7,474
==========
Pro forma net income per share............. $ 0.19
==========
Pro forma weighted average shares
outstanding............................... 39,361
Balance Sheet Data:
Working capital............................ $14,377 $ 9,076 $10,140 $ 6,322 $ 6,153
Total assets............................... 31,127 18,819 19,056 16,465 14,964
Long-term debt, less current maturities.... -- -- 8,000 2,000 5,280
Total stockholders' equity................. 23,572 14,952 7,832 7,161 4,682
(1) Through March 31, 1996, the Company was not subject to federal and state
income taxes since it had elected, under provisions of the Internal Revenue
Code, to be taxed as an S Corporation. In connection with the closing of the
Company's initial public offering (see note 11 to financial statements), the
Company terminated its status as an S Corporation effective March 31, 1996 and
became subject to federal and state income taxes. Accordingly, the statement of
income data for the year ended October 31, 1996 includes income taxes from April
1, 1996, and for informational purposes, the statement of income data for the
year ended October 31, 1996 includes a pro forma adjustment for income taxes
which would have been recorded if the Company had been subject to income taxes
for the entire fiscal year presented.
14
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF RESULTS OF OPERATIONS AND
FINANCIAL CONDITION
GENERAL
Except for the historical data set forth herein, the following discussion
contains certain forward-looking information. The Company's actual results may
differ materially from these projected results. Factors that could cause or
contribute to such differences include, but are not limited to, level of sales
to key customers, actions by competitors, fluctuations in the price of raw
materials, the Company's dependence on a single manufacturing facility, ability
to protect its proprietary manufacturing technology, dependence on a limited
number of suppliers and technological changes and introductions of new competing
products.
RESULTS OF OPERATIONS
INCOME BEFORE INCOME TAX EXPENSE
Income before income tax expense increased 46.7 percent to $12 million for
fiscal 1996 from $8.2 million for fiscal 1995. This increase was primarily due
to increased sales volume and a reduction in interest expense.
Income before income tax expense increased 134.4 percent to $8.2 million for
fiscal 1995 from $3.5 million in fiscal 1994. This increase was primarily due to
increased sales volume and reductions in royalties, amortization of intangibles
and interest expense. These positive factors were offset by a reduction in gross
profit margin and an increase in selling, general and administrative expenses.
NET INCOME
Net income increased 12.4 percent to $9.2 million for fiscal 1996 from $8.2
million for fiscal 1995. This increase was a result of a $3.8 million increase
in income before income tax expense which was offset by the recording of income
tax expense of $2.8 million for fiscal 1996 as a result of the Company's
termination of its S Corporation status effective March 31, 1996 as noted below.
Net income increased 144.8 percent to $8.2 million for fiscal 1995 from $3.3
million for fiscal 1994. This increase was a result of a $4.7 million increase
in income before income tax expense and extraordinary item and a $149,000
extraordinary loss in fiscal 1994 due to an early repayment premium associated
with certain senior subordinated notes.
NET SALES
Net sales consists of gross sales of products, less discounts, refunds and
returns. Net sales increased 24.2 percent to $45.2 million in fiscal 1996 from
$36.4 million for fiscal 1995. This increase was attributable to the Company's
continued effort to reach a broader customer base throughout the United States
and internationally with increased advertising, trade show attendance and direct
sales presence in more states. This effort resulted in greater sales in all
market segments and product types. Additionally, net sales were favorably
impacted by increases in both large and small orders. Sales from orders less
than $50,000 increased 18.5 percent to $36.5 million in fiscal 1996 from $30.8
million in fiscal 1995, and sales from orders $50,000 or more increased 55.4
percent to $8.7 million from $5.6 million.
Net sales increased 38.7 percent to $36.4 million in fiscal 1995 from $26.2
million for fiscal 1994. This increase was attributable to the Company's
continued effort to reach a broader customer base throughout the United States
and internationally with increased advertising, trade show attendance, and
direct sales presence in more states. This effort resulted in greater sales in
all market segments and product types. Additionally, net sales were favorably
impacted by increases in both large and small orders. Sales from orders less
than $50,000 increased 44.6 percent to $30.8 million in fiscal 1995 from $21.3
million in fiscal 1994, and sales from orders $50,000 or more increased 14.3
percent to $5.6 million from $4.9 million.
15
The Company's base business is projected to grow rapidly with increasing market
share potential. Many new markets are expected to emerge as fiber optic sensors
are developed for production plant automation, smart highways and security
applications, along with a host of other specialty markets. Most electronic
communication devices produced by the vast number of global suppliers are
expected to rely more heavily on fiber optic communications to achieve their
performance goals. Management believes the Company's unique technological
background and specialty market expertise should lend itself well to capture an
increasing share of this global market along with expected earnings growth.
Optical Cable Corporation also intends to make inroads into various other
markets such as single mode telecommunications and cable television.
GROSS PROFIT MARGIN
Cost of goods sold consists of the cost of materials, compensation costs and
overhead related to the Company's manufacturing operations. The Company's gross
profit margin (gross profit as a percentage of net sales) increased slightly to
44.8 percent in fiscal 1996 from 44.7 percent in fiscal 1995. The Company's
gross profit margin decreased to 44.7 percent in fiscal 1995 from 46.1 percent
in fiscal 1994. This decrease was due to the Company's providing additional
discounts and incentives to its distributors, which had the effect of decreasing
prices and margins.
SELLING, GENERAL AND ADMINISTRATIVE EXPENSES
Selling, general and administrative expenses consist of the compensation costs
(including sales commissions) for sales and marketing personnel, travel
expenses, customer support expenses, trade show expenses, advertising, the
compensation cost for administration, finance and general management personnel,
as well as legal and accounting fees. Selling, general and administrative
expenses as a percentage of net sales were 18.6 percent in fiscal 1996 compared
to 21.1 percent in fiscal 1995. This lower percentage was primarily the result
of the fact that net sales for fiscal 1996 increased 24.2 percent from fiscal
1995.
Selling, general and administrative expenses as a percentage of net sales were
21.1 percent in fiscal 1995. Selling, general and administrative expenses in
fiscal 1994 as a percentage of net sales were 22.1 percent. This lower
percentage was primarily the result of the fact that net sales for fiscal 1995
increased 38.7 percent from fiscal 1994.
ROYALTIES
On November 1, 1989, the Company entered into a Royalty Agreement pursuant to
which the Company was required to pay the previously sole stockholder an annual
royalty equal to 4.5 percent of the Company's net sales. The Royalty Agreement
was terminated October 31, 1994. (See note 7 to financial statements).
AMORTIZATION OF INTANGIBLES
Amortization of intangibles consists of amortization of amounts paid for a
noncompete agreement and a technologies license agreement in connection with the
Company's purchase in 1989 of all the shares held by a former stockholder, and
deferred financing costs associated with borrowing funds to finance the costs of
that purchase. By June 1994, these intangibles had been fully amortized.
INTEREST EXPENSE
The $369,000 reduction in interest expense in fiscal 1996 compared to fiscal
1995 is due to the Company generating adequate amounts of cash from operations
to meet its cash needs thereby requiring limited use of its revolving line of
credit during fiscal 1996. The $230,000 reduction in interest expense in fiscal
1995 compared to fiscal 1994 is due to a decrease of $9.4 million in outstanding
indebtedness in 1995.
INCOME TAXES
Through March 31, 1996, the Company was not subject to federal and state income
taxes since it had elected, under provisions of the Internal Revenue Code, to be
taxed as an S Corporation. In lieu of corporation income taxes, the stockholders
of an S Corporation are taxed on their proportionate share of the Company's
taxable income.
16
In connection with the closing of the Company's initial public offering (see
note 11 to financial statements), the Company terminated its status as an S
Corporation effective March 31, 1996 and became subject to federal and state
income taxes. Accordingly, the statement of income for the year ended October
31, 1996 includes income taxes from April 1, 1996, and for informational
purposes, the statement of income for the year ended October 31, 1996 includes a
pro forma adjustment for income taxes which would have been recorded if the
Company had been subject to income taxes for the entire fiscal year presented.
The Company recorded a $114,000 net benefit for deferred income taxes upon
termination of the Company's S Corporation status. The adjustment reflects the
net deferred income tax asset balance at March 31, 1996 in accordance with the
provisions of Statement of Financial Accounting Standards No. 109, Accounting
for Income Taxes, which requires an asset and liability approach for the
accounting and financial reporting of income taxes. See note 10 to financial
statements for further details regarding income taxes.
FINANCIAL CONDITION
Total assets at October 31, 1996 were $31.1 million, an increase of $12.3
million, or 65.4 percent over October 31, 1995. This increase was primarily due
to an increase of $3.2 million in trade accounts receivable, net, resulting from
the increased sales volume during fiscal 1996, an increase of $4.2 million in
inventory due to anticipated increases in sales volume and prices of raw
materials in fiscal 1997, an increase of $3.5 million in property and equipment,
net, and an increase in cash and cash equivalents of $1.1 million resulting from
the initial public offering of the Company's common stock.
Total stockholders' equity at October 31, 1996 increased $8.6 million from
October 31, 1995 as a result of the initial public offering and net income for
the year ended October 31, 1996, less cash distributions totaling $6.2 million
to the Company's previously sole stockholder.
LIQUIDITY AND CAPITAL RESOURCES
The Company has financed its cash requirements through cash flows from
operations along with short-term borrowings. On March 1, 1996, the Company and
its bank executed a loan commitment letter renewing its $5 million revolving
line of credit arrangement for another year under substantially similar terms;
however, the line of credit as renewed does not contain the restrictive
financial covenants contained in the previous agreement.
The Company's primary capital needs have been to (i) fund working capital
requirements, (ii) repay indebtedness, (iii) purchase property and equipment for
expansion and (iv) fund distributions to its previously sole stockholder
primarily to satisfy his tax liabilities resulting from S Corporation status.
The Company's primary sources of financing have been cash from operations, bank
borrowings and the initial public offering of the Company's common stock. The
Company believes that its cash flow from operations, available lines of credit
and the remaining portion of the net proceeds from the public offering that the
Company intends to use for general corporate purposes will be adequate to fund
its operations for at least the next twelve months. The Company is not aware of
any trends, commitments or events that will result in or that are reasonably
likely to result in a material increase or decrease in liquidity thereafter. As
of the date hereof, the Company has no additional material sources of financing.
Cash flows from operations were approximately $4.1 million, $11.3 million and
$4.3 million in fiscal 1996, 1995 and 1994, respectively. For fiscal 1996, cash
flows from operations were primarily provided by operating income, offset by an
increase in trade accounts receivable of $3.4 million, an increase in inventory
of $4.2 million and income taxes paid of $2.7 million. Cash flows from
operations in fiscal 1995 were primarily provided by operating income and a
decrease in inventory of $2.8 million. In 1995, the Company reduced its
inventory of optical fiber because it had additional access to ready supplies.
Cash flows from operations in fiscal 1994 were primarily provided by operating
income and decreases in inventory and amortization of intangibles.
17
Net cash used in investing activities was primarily for expenditures related to
facilities and equipment and was $3.1 million, $387,000 and $4.2 million in
fiscal 1996, 1995 and 1994, respectively. In July 1996, the Company entered into
a contract for the expansion of its headquarters facilities totaling $3.2
million. Construction is expected to be completed by the end of January 1997.
Total remaining commitments under the construction contract and related
equipment purchases as of October 31, 1996 approximated $1.7 million. There are
no other material commitments for capital expenditures as of October 31, 1996.
Net cash provided by (used in) financing activities was $193,000, $(10.5)
million and $(114,000) in fiscal 1996, 1995 and 1994, respectively. The net cash
provided by financing activities in fiscal 1996 consisted of an increase in debt
outstanding under the line of credit of $794,000 and net proceeds from the
issuance of common stock of $5.5 million, offset by $6.2 million in cash
distributions to the Company's previously sole stockholder. The net cash used in
financing activities in fiscal 1995 consisted of a decrease in debt outstanding
under the line of credit of $5.9 million, payments on long-term debt of $3.5
million and cash distributions to the Company's previously sole stockholder of
$1.1 million. The net cash used in financing activities in fiscal 1994 consisted
of an increase in debt outstanding under the line of credit of $4.3 million,
proceeds of $3.5 million from a real estate loan related to the Company's
purchase of its previously leased manufacturing facility in 1994, offset by
payments of $5.3 million from the repayment of certain senior subordinated notes
and $2.7 million in cash distributions to the Company's previously sole
stockholder.
NEW ACCOUNTING STANDARDS
In March 1995, the Financial Accounting Standards Board (the "FASB") issued
Statement of Financial Accounting Standards No. 121, Accounting for the
Impairment of Long-lived Assets and for Long- lived Assets to be Disposed of
("SFAS No. 121"). SFAS No. 121 requires companies to review long-lived assets
and certain identifiable intangibles to be held, used or disposed of, for
impairment whenever events or changes in circumstances indicate that the
carrying amount of an asset may not be recoverable. The Company is required to
adopt this statement in fiscal 1997. The Company believes the adoption of this
statement will not have a significant effect on its financial statements.
In October 1995, the FASB issued Statement of Financial Accounting Standards No.
123, Accounting for Stock-based Compensation ("SFAS No. 123"), which is
effective for transactions entered into in fiscal years beginning after December
15, 1995. The Company plans to retain the intrinsic value method of APB Opinion
No. 25, Accounting for Stock Issued to Employees, for recognizing stock-based
compensation in the financial statements. Management believes the adoption of
SFAS No. 123 will not have a material impact on the Company's financial position
or results of operations; however, the Company is still evaluating the new
disclosure requirements under SFAS No. 123.
COMMON STOCK AND DIVIDEND DATA
The common stock of Optical Cable Corporation is traded over the counter on the
NASDAQ National Market under the symbol OCCF.
At December 31, 1996, there were approximately 6,050 stockholders of record. No
cash dividends have been declared or paid since the completion of the initial
public offering in April 1996. While there are no restrictions on the payment of
dividends, the Company does not anticipate the payment of dividends for the
foreseeable future.
FISCAL YEAR RANGE OF BID
ENDED PRICES
OCTOBER 31, 1996 --------------
------------
HIGH LOW
------ ------
First Quarter ... N/A N/A
Second Quarter .. $ 4.63 $2.38
Third Quarter ... $34.00 $4.25
Fourth Quarter .. $20.00 $8.25
18
ITEM 8. FINANCIAL STATEMENTS AND FINANCIAL STATEMENT SCHEDULES
FINANCIAL STATEMENTS:
Page
Independent Auditors' Report.................................................... 20
Balance Sheets as of October 31, 1996 and 1995.................................. 21
Statements of Income for the Years ended October 31, 1996, 1995 and 1994 ....... 22
Statements of Stockholders' Equity for the Years ended October 31, 1996, 1995
and 1994....................................................................... 23
Statements of Cash Flows for the Years ended October 31, 1996, 1995 and 1994.... 24
Notes to Financial Statements................................................... 25
FINANCIAL STATEMENT SCHEDULES:
Financial statement schedules have been omitted since they are either not
required, not applicable, or the information is otherwise included herein.
19
INDEPENDENT AUDITORS' REPORT
The Board of Directors and Stockholders
Optical Cable Corporation:
We have audited the accompanying balance sheets of Optical Cable Corporation as
of October 31, 1996 and 1995, and the related statements of income,
stockholders' equity, and cash flows for each of the years in the three-year
period ended October 31, 1996. These financial statements are the responsibility
of the Company' management. Our responsibility is to express an opinion on these
financial statements based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audits to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the financial statements referred to above present fairly, in
all material respects, the financial position of Optical Cable Corporation as of
October 31, 1996 and 1995, and the results of its operations and its cash flows
for each of the years in the three-year period ended October 31, 1996, in
conformity with generally accepted accounting principles.
/s/ KPMG Peat Marwick LLP
Roanoke, Virginia
December 13, 1996
20
OPTICAL CABLE CORPORATION
BALANCE SHEETS
OCTOBER 31, 1996 AND 1995
OCTOBER 31,
-----------------------------
1996 1995
-------------- --------------
Assets .............................................................
Current assets:
Cash and cash equivalents.......................................... $ 1,677,739 $ 535,235
Trade accounts receivable, net of allowance for doubtful accounts
of $300,000 in 1996 and $200,000 in 1995.......................... 9,368,476 6,186,888
Other receivables.................................................. 354,041 98,297
Due from employees................................................. 1,475 3,225
Inventories........................................................ 10,261,437 6,033,042
Prepaid expenses................................................... 64,863 86,553
Deferred income taxes.............................................. 155,304 --
-------------- --------------
Total current assets.............................................. 21,883,335 12,943,240
Other assets........................................................ 67,996 201,237
Property and equipment, net......................................... 9,175,871 5,674,232
-------------- --------------
Total assets...................................................... $31,127,202 $18,818,709
============== ==============
Liabilities and Stockholders' Equity ...............................
Current liabilities:
Notes payable...................................................... $ 1,103,000 $ 309,000
Accounts payable and accrued expenses.............................. 5,488,765 2,726,727
Accrued compensation and payroll taxes............................. 676,725 831,197
Income taxes payable............................................... 237,926 --
-------------- --------------
Total current liabilities......................................... 7,506,416 3,866,924
Deferred income taxes............................................... 49,227 --
-------------- --------------
Total liabilities................................................. 7,555,643 3,866,924
-------------- --------------
Stockholders' equity:
Preferred stock, no par value, authorized 1,000,000 shares; none
issued and outstanding............................................ -- --
Common stock, voting; no par value, authorized 50,000,000 shares;
issued and outstanding 38,675,416 shares in 1996 and 36,000,000
shares in 1995.................................................... 18,594,116 596
Additional paid-in capital......................................... -- 767,849
Retained earnings.................................................. 4,977,443 14,183,340
-------------- --------------
Total stockholders' equity........................................ 23,571,559 14,951,785
Commitments and contingencies ......................................
-------------- --------------
Total liabilities and stockholders' equity........................ $31,127,202 $18,818,709
============== ==============
See accompanying notes to financial statements.
21
OPTICAL CABLE CORPORATION
STATEMENTS OF INCOME
YEARS ENDED OCTOBER 31, 1996, 1995 AND 1994
YEARS ENDED OCTOBER 31,
--------------------------------------------
1996 1995 1994
-------------- -------------- --------------
Net sales........................................ $45,152,299 $36,359,953 $26,216,583
Cost of goods sold............................... 24,907,373 20,121,355 14,138,060
-------------- -------------- --------------
Gross profit................................... 20,244,926 16,238,598 12,078,523
Operating expenses:
Selling, general and administrative expenses.... 8,415,798 7,660,100 5,797,634
Royalties....................................... -- -- 1,177,399
Amortization of intangibles..................... -- -- 991,470
-------------- -------------- --------------
Total operating expenses....................... 8,415,798 7,660,100 7,966,503
-------------- -------------- --------------
Income from operations......................... 11,829,128 8,578,498 4,112,020
Other income (expense):
Interest income................................. 94,888 175 1,217
Interest expense................................ (9,595) (378,205) (607,882)
Other, net...................................... 112,988 (377) (7,170)
-------------- -------------- --------------
Other income (expense), net.................... 198,281 (378,407) (613,835)
-------------- -------------- --------------
Income before income tax expense and
extraordinary item............................ 12,027,409 8,200,091 3,498,185
Income tax expense............................... 2,806,849 -- --
-------------- -------------- --------------
Income before extraordinary item............... 9,220,560 8,200,091 3,498,185
Extraordinary item - loss on extinguishment of
debt............................................ -- -- 148,968
-------------- -------------- --------------
Net income..................................... $ 9,220,560 $ 8,200,091 $ 3,349,217
============== ============== ==============
Pro forma income data (unaudited):
Net income before pro forma income tax
provision, as reported......................... $ 9,220,560
Pro forma income tax provision.................. 1,746,513
--------------
Pro forma net income............................ $ 7,474,047
==============
Pro forma net income per share.................. $ 0.19
==============
Pro forma weighted average shares outstanding... 39,360,659
==============
See accompanying notes to financial statements.
22
OPTICAL CABLE CORPORATION
STATEMENTS OF STOCKHOLDERS' EQUITY
YEARS ENDED OCTOBER 31, 1996, 1995 AND 1994
COMMON STOCK
----------------------------
ADDITIONAL TOTAL
PAID-IN RETAINED STOCKHOLDERS'
SHARES AMOUNT CAPITAL EARNINGS EQUITY
------------- -------------- ------------ -------------- ---------------
Balances at October 31, 1993........................ 36,000,000 $ 596 $ 767,849 $ 6,392,754 $ 7,161,199
Cash distributions to previously sole stockholder . -- -- -- (2,678,722) (2,678,722)
Net income.......................................... -- -- -- 3,349,217 3,349,217
------------- -------------- ------------ -------------- ---------------
Balances at October 31, 1994........................ 36,000,000 596 767,849 7,063,249 7,831,694
Cash distributions to previously sole stockholder .. -- -- -- (1,080,000) (1,080,000)
Net income.......................................... -- -- -- 8,200,091 8,200,091
------------- -------------- ------------ -------------- ---------------
Balances at October 31, 1995........................ 36,000,000 596 767,849 14,183,340 14,951,785
Net income - five months ended March 31, 1996 ...... -- -- -- 4,243,117 4,243,117
Issuance of common stock for cash ($2.50 per share,
less issuance costs of $1,139,326).................. 2,675,416 5,549,214 -- -- 5,549,214
Cash distributions to previously sole stockholder .. -- -- -- (6,150,000) (6,150,000)
Recapitalization.................................... -- 13,044,306 (767,849) (12,276,457) --
Net income - seven months ended October 31, 1996 ... -- -- -- 4,977,443 4,977,443
------------- -------------- ------------ -------------- ---------------
Balances at October 31, 1996........................ 38,675,416 $18,594,116 $ -- $ 4,977,443 $23,571,559
============= ============== ============ ============== ===============
See accompanying notes to financial statements.
23
OPTICAL CABLE CORPORATION
STATEMENTS OF CASH FLOWS
YEARS ENDED OCTOBER 31, 1996, 1995 AND 1994
YEARS ENDED OCTOBER 31,
------------------------------------------
1996 1995 1994
------------- -------------- -------------
Cash flows from operating activities:
Net income....................................... $ 9,220,560 $ 8,200,091 $ 3,349,217
Adjustments to reconcile net income to net cash
provided by operating activities:
Depreciation and amortization.................. 533,445 404,469 308,778
Amortization of intangibles.................... -- -- 991,470
Bad debt expense............................... 266,366 87,652 137,485
Deferred income taxes.......................... (106,077) -- --
Loss on sale of property and equipment......... -- 381 11,469
(Increase) decrease in:
Trade accounts receivable..................... (3,447,954) (1,921,238) (234,645)
Other receivables............................. (255,744) (45,514) (52,783)
Due from employees............................ 1,750 (2,800) 5,963
Inventories................................... (4,228,395) 2,813,002 372,430
Prepaid expenses.............................. 21,690 (80,721) 73,929
Other assets.................................. 116,237 (201,237) --
Increase (decrease) in:
Accrued interest payable ..................... -- (8,458) (285,875)
Accounts payable and accrued expenses......... 1,881,379 1,603,409 (292,167)
Accrued compensation and payroll taxes........ (154,472) 450,928 (65,885)
Income taxes payable.......................... 237,926 -- --
-------------- -------------
Net cash provided by operating activities..... 4,086,711 11,299,964 4,319,386
-------------- -------------
Cash flows from investing activities:
Purchase of property and equipment............... (3,137,421) (387,231) (4,168,198)
Proceeds from sale of property and equipment .... -- 20 3,499
------------- -------------- -------------
Net cash used in investing activities......... (3,137,421) (387,211) (4,164,699)
------------- -------------- -------------
Cash flows from financing activities:
Net borrowings (payments) on notes payable....... 794,000 (5,903,238) 4,344,762
Proceeds from long-term debt..................... -- -- 3,500,000
Payments on long-term debt....................... -- (3,500,000) (5,280,000)
Proceeds from issuance of common stock, net of
issuance costs.................................. 5,549,214 -- --
Cash distributions to previously sole
stockholder..................................... (6,150,000) (1,080,000) (2,678,722)
------------- -------------- -------------
Net cash provided by (used in) financing
activities................................... 193,214 (10,483,238) (113,960)
------------- -------------- -------------
Net increase in cash and cash equivalents ........ 1,142,504 429,515 40,727
Cash and cash equivalents at beginning of year ... 535,235 105,720 64,993
------------- -------------- -------------
Cash and cash equivalents at end of year ......... $ 1,677,739 $ 535,235 $ 105,720
============= ============== =============
Supplemental Disclosure of Cash Flow Information:
Cash payments for interest....................... $ 9,595 $ 386,663 $ 893,757
============== =============
Income taxes paid................................ $ 2,675,000 $ -- $ --
============= ============== =============
Noncash investing activities - capital
expenditures
accrued in accounts payable..................... $ 880,659 $ -- $ --
============= ============== =============
See accompanying notes to financial statements.
24
OPTICAL CABLE CORPORATION
Notes to Financial Statements
YEARS ENDED OCTOBER 31, 1996, 1995 AND 1994
(1) DESCRIPTION OF BUSINESS AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
(A) DESCRIPTION OF BUSINESS
Optical Cable Corporation (the Company) manufactures and markets a broad range
of fiber optic cables for high bandwidth transmission of data, video and audio
communications over moderate distances. The Company's fiber optic cables are
sold nationwide and in over 60 foreign countries (also see note 9).
(B) CASH EQUIVALENTS
Cash equivalents of $1,397,510 at October 31, 1996 consist of money market
mutual funds. Cash equivalents of $265,000 at October 31, 1995 consist of
collateralized overnight repurchase agreements. For purposes of the statements
of cash flows, the Company considers all highly liquid debt instruments with
original maturities of three months or less to be cash equivalents.
(C) INVENTORIES
Inventories of raw materials and production supplies are stated at the lower of
cost (specific identification for optical fibers and first-in, first-out for
other raw materials and production supplies) or market. Inventories of work in
process and finished goods are stated at average cost, which includes raw
materials, direct labor and manufacturing overhead.
(D) PROPERTY AND EQUIPMENT
Property and equipment are stated at cost. Depreciation and amortization are
provided for using both straight-line and declining balance methods over the
estimated useful lives of the assets. Estimated useful lives are thirty-nine
years for buildings and improvements and five to seven years for machinery and
equipment and furniture and fixtures.
(E) REVENUE RECOGNITION
Revenue is recognized at the time of product shipment or delivery to the
customer, based on shipping terms.
(F) INCOME TAXES
Through March 31, 1996, the Company was not subject to federal and state income
taxes since it had elected, under provisions of the Internal Revenue Code, to be
taxed as an S Corporation. In lieu of corporation income taxes, the stockholders
of an S Corporation are taxed on their proportionate share of the Company's
taxable income.
In connection with the closing of the Company's initial public offering (see
note 11), the Company terminated its status as an S Corporation effective March
31, 1996 and became subject to federal and state income taxes. Accordingly, the
statement of income for the year ended October 31, 1996 includes income taxes
from April 1, 1996, and for informational purposes, the statement of income for
the year ended October 31, 1996 includes a pro forma adjustment for income taxes
which would have been recorded if the Company had been subject to income taxes
for the entire fiscal year presented.
Effective March 31, 1996, income taxes are accounted for under the asset and
liability method. Deferred tax assets and liabilities are recognized for the
future tax consequences attributable to differences between the financial
statement carrying amounts of existing assets and liabilities and their
respective tax bases and operating loss and tax credit carryforwards. Deferred
tax assets and
25
liabilities are measured using enacted tax rates expected to apply to taxable
income in the years in which those temporary differences are expected to be
recovered or settled. The effect on deferred tax assets and liabilities of a
change in tax rates is recognized in income in the period that includes the
enactment date.
(G) AMORTIZATION OF INTANGIBLES
Amortization of intangibles includes the amortization of a noncompete agreement
and technology license agreement with a former stockholder which were perfected
as part of a leveraged settlement agreement signed on June 22, 1989. The costs
of these two agreements were determined based on historical data pertaining to
royalties, salaries and bonuses paid to the former stockholder. These costs were
amortized over the lives of the agreements (five years) using the straight-line
method.
Amortization of intangibles also includes the amortization of deferred financing
costs incurred in connection with the financing of the leveraged settlement
agreement. These costs were amortized over the life of the outstanding long-term
debt using the straight-line method.
(H) STOCK-BASED EMPLOYEE COMPENSATION
The Company sponsors a stock incentive plan for selected key management
employees. The Company accounts for this stock-based employee compensation plan
in accordance with APB Opinion No. 25.
(I) PRO FORMA NET INCOME PER SHARE
Pro forma net income per share was computed by dividing pro forma net income by
the pro forma weighted average number of common shares outstanding during the
period (as adjusted for the recapitalization) and by deeming to be outstanding
the number of shares (1,800,000) the Company would have needed to issue at the
initial public offering price per share ($2.50) to pay a $1 million cash
distribution to the previously sole stockholder in December 1995 and a $3.5
million cash distribution to the previously sole stockholder out of the proceeds
of the initial public offering.
(J) USE OF ESTIMATES
The preparation of financial statements in conformity with generally accepted
accounting principles requires management to make estimates and assumptions that
affect the reported amounts of assets and liabilities and the disclosure of
contingent assets and liabilities at the date of the financial statements and
the reported amounts of revenues and expenses during the reporting period.
Actual results could differ from these estimates.
(2) ALLOWANCE FOR DOUBTFUL ACCOUNTS RECEIVABLE
A summary of changes in the allowance for doubtful accounts receivable for the
years ended October 31, 1996, 1995 and 1994 follows:
YEARS ENDED OCTOBER 31,
------------------------------------
1996 1995 1994
----------- ----------- ------------
Balance at beginning of
year........................ $ 200,000 $ 250,000 $ 350,000
Bad debt expense............ 266,366 87,652 137,485
Losses charged to
allowance................... (166,366) (137,652) (237,485)
----------- ----------- ------------
Balance at end of year ..... $ 300,000 $ 200,000 $ 250,000
=========== =========== ============
26
(3) INVENTORIES
INVENTORIES AT OCTOBER 31, 1996 AND 1995 CONSIST OF THE FOLLOWING:
OCTOBER 31,
---------------------------
1996 1995
------------- -------------
Finished goods...... $ 2,465,659 $2,331,995
Work in process..... 3,104,339 1,594,193
Raw materials....... 4,645,843 2,067,949
Production supplies 45,596 38,905
------------- -------------
$10,261,437 $6,033,042
============= =============
(4) PROPERTY AND EQUIPMENT
Property and equipment at October 31, 1996 and 1995 consist of the following:
OCTOBER 31,
----------------------------
1996 1995
------------- --------------
Land........................................... $ 2,745,327 $ 1,362,595
Building and improvements...................... 3,401,997 3,401,997
Machinery and equipment........................ 3,982,889 2,969,263
Furniture and fixtures......................... 428,742 403,631
Construction in progress ...................... 1,596,611 --
------------- --------------
Total property and equipment, at cost........ 12,155,566 8,137,486
Less accumulated amortization and depreciation (2,979,695) (2,463,254)
------------- --------------
Property and equipment, net.................. $ 9,175,871 $ 5,674,232
============= ==============
In July 1996, the Company entered into a contract for the expansion of its
headquarters facilities totaling $3.2 million. Construction is expected to be
completed by the end of January 1997. Total remaining commitments under the
construction contract and related equipment purchases as of October 31, 1996
approximated $1.7 million.
(5) NOTES PAYABLE
The Company has a revolving line of credit arrangement with a bank that expires
February 28, 1997. The arrangement permits the Company to borrow a maximum
amount of $5,000,000. The line of credit is limited to 80 percent of eligible
accounts receivable and 50 percent of raw materials and finished goods
inventories. The line of credit bears interest at 1.50 percent above the monthly
LIBOR rate not to exceed the lender's prime rate less 1.0 percent (6.94 percent
as of October 31, 1996) payable daily and is collateralized by all of the
Company's accounts receivable, contract rights, inventories, property and
equipment, and general intangibles. The outstanding balance on the line of
credit was $1,103,000 and $309,000 at October 31, 1996 and 1995, respectively.
While the line of credit does not require a compensating balance that legally
restricts the use of cash amounts, at the bank's request, the Company has agreed
to maintain an unrestricted target cash balance of $125,000.
The Company was previously obligated under senior subordinated notes payable
which were subject to an early repayment premium. On June 1, 1994, the Company
repaid the remaining $2,000,000 annual installment originally due June 1, 1995
and recognized an extraordinary loss of $148,968 for the early repayment
premium.
27
(6) LEASES
In August 1994, the Company entered into a four-year operating lease for
computerized mailing and shipping equipment with an unrelated party. Rent
expense under this lease amounted to $25,030, $25,030 and $5,729 for the years
ended October 31, 1996, 1995 and 1994, respectively. Future minimum rental
payments required under the lease are as follows:
YEARS ENDING OCTOBER 31,
- -------------------------
1997..................... $25,030
1998..................... 18,772
----------
$43,802
==========
On May 1, 1990, the Company entered into a ten-year operating lease of its
manufacturing facility. The lessor was a partnership in which the Company's
previously sole stockholder was the limited partner. On October 20, 1994, the
Company exercised its option under the lease agreement to purchase the leased
premises at fair market value, based on an independent appraisal. The purchase
price paid to the partnership for the leased premises was approximately
$4,000,000. Rent expense under this lease amounted to $428,263 for the year
ended October 31, 1994.
(7) RELATED PARTY AGREEMENTS
Through October 31, 1994, Optical Cable Corporation had a royalty agreement with
its previously sole stockholder in which the stockholder granted the Company the
exclusive license to use certain cable manufacturing techniques and equipment
designs without restriction. Royalty payments were equal to 4.5 percent of net
sales. Royalties under this agreement amounted to $1,177,399 for the year ended
October 31, 1994.
Effective November 1, 1994, the Company entered into two separate one-year
employment agreements with its previously sole stockholder. Total compensation
under the agreements consisted of salary payments equal to 6 percent of the
previous fiscal year's net sales. Effective February 1, 1995, these agreements
were replaced by an employment agreement that expires October 31, 1997 and that
reduces the salary payment percentage from 6 percent to 1 percent and provides
for sales commissions equal to 1 percent of the positive difference between the
current fiscal year's net sales and the prior fiscal year's net sales.
Compensation under these agreements amounted to $451,523 and $672,371 for the
years ended October 31, 1996 and 1995, respectively.
Effective November 2, 1994, the Company entered into a services agreement to pay
sales commissions of 4 percent of net foreign sales to OCC-VI, Inc., a foreign
sales corporation. All of the outstanding shares of common stock of OCC-VI, Inc.
are beneficially owned by the Company's previously sole stockholder. For the
year ended October 31, 1995, the Company recorded commissions expense of
$343,290 (of which $261,382 is included in accrued compensation and payroll
taxes at October 31, 1995) related to the services agreement. As of September
28, 1995, the Company terminated this services agreement.
(8) EMPLOYEE BENEFITS
The Company's independently administered self-insurance program provides health
insurance coverage for employees and their dependents on a cost-reimbursement
basis. Under the program, the Company is obligated for claims payments. A stop
loss insurance contract executed with an insurance carrier covers claims in
excess of $30,000 per covered individual and $510,935 in the aggregate per year.
During the years ended October 31, 1996, 1995 and 1994, total claims expense of
$876,481, $545,543 and $477,423, respectively, was incurred, which represents
claims processed and an estimate for claims incurred but not reported.
28
Effective January 1, 1994, the Company adopted a 401(k) retirement savings plan.
To become eligible for the plan, an employee must complete six months of service
and be at least 21 years of age. The plan allows participants to contribute
through salary reduction up to 6 percent of their annual compensation on a
pretax basis. Company matching contributions are two dollars for every one
dollar contributed by an employee up to 4 percent of the employees' annual
compensation. The Company made matching contributions to the plan of $233,072,
$205,011 and $157,216 for the years ended October 31, 1996, 1995 and 1994,
respectively.
The Company and its previously sole stockholder adopted on March 1, 1996 a stock
incentive plan which is called the Optical Cable Corporation 1996 Stock
Incentive Plan (the "Plan"). The Plan is intended to provide a means for
selected key management employees to increase their personal financial interest
in the Company, thereby stimulating the efforts of these employees and
strengthening their desire to remain with the Company through the use of stock
incentives. The Company has reserved 4,000,000 shares of common stock for
issuance pursuant to incentive awards under the Plan. Under the Plan, stock
options may be granted at not less than fair market value on the date of grant.
The aggregate number of shares under option pursuant to the Plan is as follows:
NUMBER OF OPTION PRICE
SHARES PER SHARE
----------- ---------------
Options outstanding at October 31,
1995.................................... -- --
Granted................................. 460,000 $2.50
Forfeited .............................. (18,000) $2.50
----------
Options outstanding at October 31, 1996 442,000 $2.50
==========
Options exercisable at October 31,
1996.................................... --
==========
Available for grant at October 31,
1996.................................... 3,558,000
==========
The options vest 25 percent after two years, 50 percent after three years, 75
percent after four years and 100 percent after five years.
(9) BUSINESS AND CREDIT CONCENTRATIONS
The Company provides credit, in the normal course of business, to various
commercial enterprises, governmental entities and not-for-profit organizations.
Concentration of credit risk with respect to trade receivables is limited due to
the Company's large number of customers. The Company also manages exposure to
credit risk through credit approvals, credit limits and monitoring procedures.
Management believes that credit risks at October 31, 1996 and 1995 have been
adequately provided for in the financial statements.
For the years ended October 31, 1996, 1995 and 1994, 75 percent, 76 percent and
75 percent, respectively, of net sales were from customers located in the United
States, while 25 percent, 24 percent and 25 percent, respectively, were from
international customers. No foreign geographic area accounted for more than 10
percent of net sales for the years ended October 31, 1996, 1995 and 1994. As of
October 31, 1996 and 1995, there were no significant amounts receivable from any
one customer other than those described below.
29
For the year ended October 31, 1996, 12 percent of net sales were attributable
to one major domestic distributor. The related trade accounts receivable for
this distributor at October 31, 1996 totaled approximately $2,468,000. No single
customer or other distributor accounted for more than 5 percent of net sales for
the year ended October 31, 1996. As of October 31, 1996, no single customer or
other distributor had an outstanding balance payable to the Company in excess of
5 percent of total stockholders' equity.
For the year ended October 31, 1995, 10 percent of net sales were attributable
to one major domestic distributor. The related trade accounts receivable for
this distributor at October 31, 1995 totaled approximately $841,000. No single
customer or other distributor accounted for more than 5 percent of net sales for
the year ended October 31, 1995. As of October 31, 1995, no single customer or
other distributor had an outstanding balance payable to the Company in excess of
5 percent of total stockholder's equity.
For the year ended October 31, 1994, no single customer accounted for more than
5 percent of net sales.
(10) INCOME TAXES
The Company recorded a $114,045 net benefit for deferred income taxes upon
termination of the Company's S Corporation status. The adjustment reflects the
net deferred income tax asset balance at March 31, 1996 in accordance with the
provisions of Statement of Financial Accounting Standards No. 109, Accounting
for Income Taxes, which requires an asset and liability approach for the
accounting and financial reporting of income taxes. The components of the net
deferred tax asset at March 31, 1996 were substantially the same as the October
31, 1996 components presented below.
Income tax expense for the year ended October 31, 1996 consists of:
CURRENT DEFERRED TOTAL
------------ ------------ -------------
U.S. Federal . $2,556,601 $ (93,490) $2,463,111
State ........ 356,325 (12,587) 343,738
------------ ------------ -------------
Totals........ $2,912,926 $(106,077) $2,806,849
============ ============ =============
Reported income tax expense for the year ended October 31, 1996 differs from the
"expected" tax expense, computed by applying the U.S. Federal statutory income
tax rate of 35 percent to income before income tax expense and extraordinary
item, as follows:
"Expected" tax expense.......................................... $ 4,209,593
Increase (reduction) in income tax expense resulting from:
S Corporation taxable income for the five months ended March
31, 1996...................................................... (1,485,091)
Net deferred income tax asset balance at March 31, 1996........ (114,045)
Foreign Sales Corporation benefit.............................. (98,473)
State income taxes, net of federal benefits.................... 215,967
Other differences, net ........................................ 78,898
--------------
Reported income tax expense..................................... $ 2,806,849
==============
30
The tax effects of temporary differences that give rise to significant portions
of the Company's net deferred tax asset as of October 31, 1996 are presented
below:
Deferred tax assets:
Accounts receivable, due to allowance for doubtful accounts............. $ 113,775
Inventories, due to additional costs inventoried for tax purposes
pursuant to the Tax Reform Act of 1986................................. 91,781
Self-insured health care costs, due to accrual for financial reporting
purposes .............................................................. 43,780
------------
Total gross deferred tax assets.......................................... 249,336
Less valuation allowance................................................. --
------------
Net deferred tax assets.................................................. 249,336
Deferred tax liabilities:
Plant and equipment, due to differences in depreciation and capital gain
recognition............................................................ (49,227)
Other receivables, due to accrual for financial reporting purposes ..... (94,032)
------------
Total gross deferred tax liabilities..................................... (143,259)
Net deferred tax asset, including current net tax asset of $155,304 and
noncurrent net tax liability of $49,227................................. $ 106,077
============
Based on the Company's historical and current pretax earnings, management
believes that it is more likely than not that the recorded deferred tax assets
will be realized.
(11) RECAPITALIZATION AND INITIAL PUBLIC OFFERING
The Company's Board of Directors authorized the filing of a registration
statement for a public offering of the Company's common stock. In connection
with the public offering, the Board and the previously sole stockholder approved
an increase in the number of authorized shares of common stock from 50,000
shares to 50,000,000 shares, a recapitalization involving an exchange of all
outstanding $1 par value common stock (596 shares) on a 60,403-for-1 basis for
no par value common stock (36,000,000 shares) and the authorization of 1,000,000
shares of preferred stock, no par value, issuable in multiple series.
On April 1, 1996, the Company completed a public offering of 2,675,416 shares of
the Company's common stock from which it received net proceeds of approximately
$5.5 million.
At October 31, 1995, included in noncurrent other assets are deferred costs
related to the public offering in the amount of $201,237. These deferred costs
were charged against the gross proceeds of the public offering.
In connection with the recapitalization, additional paid-in capital as of March
31, 1996 has been reclassified to no par value common stock, and the amount of
the undistributed taxable S Corporation earnings remaining as of March 31, 1996
has been reclassified to no par value common stock.
31
(12) STOCK DIVIDENDS
On May 14, 1996, the Board of Directors declared a 2-for-1 stock split effected
in the form of a one hundred percent (100%) stock dividend paid on May 31, 1996
to stockholders of record at the close of business on May 15, 1996. On June 5,
1996, the Board of Directors declared a 2-for-1 stock split effected in the form
of a one hundred percent (100%) stock dividend paid on June 21, 1996 to
stockholders of record at the close of business on June 6, 1996. All share and
per share data have been adjusted to reflect these stock dividends.
(13) FAIR VALUE OF FINANCIAL INSTRUMENTS
Statement of Financial Accounting Standards No. 107, Disclosures About Fair
Value of Financial Instruments ("SFAS No. 107"), requires the Company to
disclose estimated fair values of its financial instruments. SFAS No. 107
defines the fair value of a financial instrument as the amount at which the
instrument could be exchanged in a current transaction between willing parties.
The carrying amounts reported in the balance sheet for cash, cash equivalents,
trade accounts receivable, other receivables, notes payable, accounts payable
and accrued expenses approximate fair value because of the short maturity of
these instruments.
(14) NEW ACCOUNTING STANDARDS
In March 1995, the Financial Accounting Standards Board (the "FASB") issued
Statement of Financial Accounting Standards No. 121, Accounting for the
Impairment of Long-lived Assets and for Long-lived Assets to Be Disposed of
("SFAS No. 121"). SFAS No. 121 requires companies to review long-lived assets
and certain identifiable intangibles to be held, used or disposed of, for
impairment whenever events or changes in circumstances indicate that the
carrying amount of an asset may not be recoverable. The Company is required to
adopt this statement in fiscal 1997. The Company believes the adoption of this
statement will not have a significant effect on its financial statements.
In October 1995, the FASB issued Statement of Financial Accounting Standards No.
123, Accounting for Stock-Based Compensation ("SFAS No. 123"), which is
effective for transactions entered into in fiscal years beginning after December
15, 1995. The Company plans to retain the intrinsic value method of APB Opinion
No. 25, Accounting for Stock Issued to Employees, for recognizing stock-based
compensation in the financial statements. Management believes the adoption of
SFAS No. 123 will not have a material impact on the Company's financial position
or results of operations; however, the Company is still evaluating the new
disclosure requirements under SFAS No. 123.
32
(15) QUARTERLY RESULTS OF OPERATIONS (UNAUDITED)
The following is a summary of the unaudited quarterly results of operations for
the years ended October 31, 1996 and 1995:
QUARTER ENDED
--------------------------------------------------------
YEAR ENDED OCTOBER 31, 1996 JANUARY 31 APRIL 30 JULY 31 OCTOBER 31
- ------------------------------ ------------- ------------- ------------- --------------
Net sales..................... $10,342,472 $10,183,960 $10,862,064 $13,763,803
Gross profit.................. 4,707,021 4,096,839 4,953,023 6,488,043
Income before income taxes ... 2,774,994 2,252,228 2,983,232 4,016,955
Net income.................... 2,774,994 2,068,288 1,858,823 2,518,455
Pro forma net income.......... 1,709,397 1,387,372 1,858,823 2,518,455
Pro forma net income per
share......................... 0.04 0.04 0.05 0.06
QUARTER ENDED
-----------------------------------------------------
YEAR ENDED OCTOBER 31, 1995 JANUARY 31 APRIL 30 JULY 31 OCTOBER 31
- ---------------------------- ------------ ------------ ------------ --------------
Net sales................... $8,132,636 $9,500,186 $8,697,155 $10,029,976
Gross profit................ 3,481,233 3,975,250 3,976,376 4,805,739
Income before income taxes . 1,435,750 2,028,848 1,877,586 2,857,907
Net income.................. 1,435,750 2,028,848 1,877,586 2,857,907
33
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE
None.
PART III
The information called for by Items 10--13 is incorporated by reference from
the Optical Cable Corporation Notice of 1997 Annual Meeting and Proxy Statement
- -- to be filed pursuant to Regulation 14A not later than 120 days after the
close of the fiscal year.
Item 10. Directors and Executive Officers of the Registrant
Item 11. Executive Compensation
Item 12. Security Ownership of Certain Beneficial Owners and Management
Item 13. Certain Relationships and Related Transactions
34
PART IV
ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES, AND REPORTS ON FORM 8-K
(a) 1. Index of Financial Statements
Information with respect to this Item is contained in the Company's financial
statements indicated in the Index on Page 19 of this Annual Report on Form 10-K.
2. Index of Financial Statement Schedules
None.
3. Exhibits
The exhibits listed on the accompanying index of exhibits are filed as part of
this Annual Report on Form 10-K.
(b) Reports on Form 8-K
No reports on Form 8-K were filed during the last quarter of the period for
which this Annual Report is filed.
(c) Index of Exhibits
EXHIBIT
NUMBER DESCRIPTION
- ----------- ---------------------------------------------------------------------------------------------
*3.1....... Amended and Restated Articles of Incorporated of Optical Cable Corporation
*3.2....... Bylaws of Optical Cable Corporation, as amended
*4.1....... Form of certificate representing Common Stock
Royalty Agreement, dated November 1, 1993, by and between Robert Kopstein and Optical Cable
*10.1...... Corporation
Loan Agreement dated June 1, 1994, as amended by and between Optical Cable Corporation and
*10.2...... First Union National Bank of Virginia
Employment Agreement by and between Optical Cable Corporation and Robert Kopstein, effective
*10.3...... February 1, 1995
Tax Indemnification Agreement, dated as of October 19, 1995, by and between Optical Cable
*10.4...... Corporation and Robert Kopstein
Assignment of technology rights from Robert Kopstein to Optical Cable Corporation, effective
*10.5...... as of October 31, 1994
*10.6...... Proposed form of Letter Agreement by and between Optical Cable Corporation and the Agents
***10.7.... Optical Cable Corporation 1996 Stock Incentive Plan
23......... Consent of KPMG Peat Marwick LLP (filed herewith)
27......... Financial Data Schedule
**99.1..... Registration Statement on Form S-1, as amended (File No. 33-96476)
* Filed as an exhibit to the Company's Registration Statement on Form
S-1, as amended (File No. 33-96476) and incorporated herein by reference.
** Incorporated herein by reference.
*** Filed as an exhibit for the Company's Registration Statement on Form
S-8 filed on August 2, 1996 (File No. 333-09433) and incorporated herein by
reference.
35
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities
Exchange Act of 1934, the registrant has duly caused this report to be signed on
its behalf by the undersigned, thereunto duly authorized.
OPTICAL CABLE CORPORATION
Date: January 29, 1997 By /s/ Robert Kopstein
Robert Kopstein
Chairman of the Board
President and Chief
Executive Officer
Pursuant to the requirements of the Securities Exchange Act of 1934, this
report has been signed below by the following persons on behalf of the
registrant and in the capacities indicated as of January 29, 1997.
/s/ Robert Kopstein Chairman of the Board, President, Chief Executive
Robert Kopstein Officer and Director
(principal executive officer)
/s/ Luke J. Huybrechts Senior Vice President of Sales and Director
Luke J. Huybrechts
/s/ Kenneth W. Harber Vice President of Finance, Treasurer, Secretary and
Kenneth W. Harber Director
(principal financial and accounting officer)
/s/ Randall H. Frazier Director
Randall H. Frazier
/s/ John M. Holland Director
John M. Holland
36
ACCOUNTANTS' CONSENT
The Board of Directors
Optical Cable Corporation:
We consent to incorporation by reference in the registration statement (No.
33-09433) on Form S-8 of Optical Cable Corporation of our report dated December
13, 1996, relating to the balance sheets of Optical Cable Corporation as of
October 31, 1996 and 1995, and the related statements of income, stockholders'
equity, and cash flows for each of the years in the three-year period ended
October 31, 1996, which report appears in the October 31, 1996, annual report on
Form 10-K of Optical Cable Corporation.
/s/ KPMG Peat Marwick LLP
Roanoke, Virginia
January 29, 1997
1
5
0001000230
OPTICAL CABLE CORPORATION
1000
U.S. DOLLARS
12-MOS
OCT-31-1996
NOV-1-1995
OCT-31-1996
1
$ 1,678
0
9,668
300
10,261
21,883
12,156
2,980
31,127
7,506
0
0
0
18,594
4,977
31,127
45,152
45,360
24,907
33,323
0
266
10
12,027
2,806
9,221
0
0
0
9,221
0.19
0.19
